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After the Supreme Court's Limelight decision, attention may shift to contract analysis in patent cases

In Limelight Networks, Inc. v. Akamai Tech., Inc., the Supreme Court unanimously held that there can be no liability for induced infringement of a patented method where the steps of the method are carried out by separate actors. Yet, only one week later, the district court in Digital Reg of Tex., LLC v. Adobe Sys., 2014 U.S. Dist. LEXIS 79854 (N.D. Cal. June 10, 2014) denied summary judgment of non-infringement where the plaintiff had conceded that the acts of infringement were divided among multiple parties. Why? Because although the Limelight decision precludes liability for induced infringement under 35 U.S.C. §271(b) where no single entity is liable for direct infringement, the Supreme Court left untouched the existing law that liability for direct infringement under §271(a) can be found if the defendant exercises “control or direction” over the other actors. The Federal Circuit has explained that such control or direction can exist where a third party is “contractually obligated” to the accused infringer to perform the infringing acts. Indeed, the court in Digital Reg held that there was a genuine issue of material fact as to whether the terms of the defendants’ license agreements with their customers gave rise to liability under a control or direction theory. Thus, in the wake of Limelight’s rejection of §271(b) claims in divided infringement cases, it will be all the more important for patent practitioners (and contract drafters) to consider whether the terms and conditions of business agreements place the contracting party in a position of controlling the performance of other entities.

Arms-Length Contracts Generally Do Not Amount To “Control Or Direction”

The Federal Circuit’s decision in BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007) laid the foundation for recent jurisprudence regarding divided direct infringement. In BMC Resources, the patent was directed to a multi-step debit transaction. Paymentech received customer information (e.g., debit card numbers) and contracted with third party debit networks who authorized the transactions with financial institutions. The court explained that “[a] party cannot avoid infringement…simply by contracting out steps of a patented process to another entity. In those cases, the party in control would be liable for direct infringement. It would be unfair indeed for the mastermind in such situations to escape liability.” However, as applied to the facts of the case, the court found there to be no direct infringement because Paymentech did not have the requisite control over the debit networks’ performance: “BMC’s evidence that Paymentech provides data…to the debit networks, absent any evidence that Paymentech also provides instructions or directions regarding the use of those data, [is] inadequate.” The court explicitly recognized that service contracts might be drafted to avoid vicarious liability, stating that “the standard requiring control or direction for a finding of joint infringement may in some circumstances allow parties to enter into arms-length agreements to avoid infringement.”

In Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008), the Federal Circuit went one step further by holding, in the context of software licensed to an end user, that even providing instructions to the end user does not give rise to mastermind liability where the end user is not contractually bound to act. The court held that “the control or direction standard is [only] satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method” and that “mere arms-length cooperation will not give rise to direct infringement by any party.”

The 2010 appeal in Akamai Techs., Inc. v. Limelight Networks, Inc., 629 F.3d 1311 (Fed. Cir. 2010) presented a closer question because in that case it was acknowledged that “Limelight’s [customer] agreement calls for its customers to assign a unique hostname, requires content providers to perform certain claim steps if they choose to use Limelight’s service, and provides instructions and offers technical assistance for performing those steps.” The Federal Circuit explained that direct infringement liability could indeed be found where a party is “contractually obligated to the accused infringer to perform a method step.” Nevertheless, the Federal Circuit held that “none of those points establishes either Limelight’s control over its customers or its customers’ consent to Limelight’s control. To the contrary, the agreement merely provides the customers with the tools to allow them to exercise their independent discretion and control over how and in what respect they implement the system.” Although the 2010 Akamai decision was vacated, the 2012 en banc panel only addressed the question of induced infringement, and did not disturb the law regarding direct infringement. The “contractual obligation” test has since been cited by both the Federal Circuit and the district courts.

Contracts That Dictate The Manner Of Performance May Give Rise To Mastermind Liability

Thus far, the Federal Circuit has largely addressed the scenario of end users who have the freedom to act independently. But what if such freedom is constrained? In a lengthy opinion in Emtel, Inc. v. LipidLabs, Inc., 583 F. Supp. 2d 811 (S.D. Tex. 2008), the court reasoned that:

[A] right of control requires more than a general right to order the work stopped or resumed, to inspect its progress or to receive reports, to make suggestions or recommendations which need not necessarily be followed, or to prescribe alterations and deviations…There must be such a retention of a right of supervision that the contractor is not entirely free to do the work in his own way.

In the same vein, many district courts have found that a contracting party can be directly liable for a manufacturer’s infringement of a method claim if the manufacturer makes a customized product pursuant to explicit instructions. In W.L. Gore & Assocs. v. Medtronic, Inc., 874 F. Supp. 2d 526 (E.D. Va. 2012), the patent at issue was directed to a method of manufacturing a stent. The plaintiff accused the defendants of directly infringing the patent by contracting with a third-party stent manufacturer. The district court scrutinized the relevant manufacturing agreements and concluded that the defendant had exercised sufficient control over the manufacturing process to be vicariously liable for the manufacturer’s actions. Specifically, the court found that the defendants (1) controlled the design of the stents, (2) approved the raw materials, and (3) oversaw all changes to the manufacturing process. (The court ultimately found no infringement on other grounds).

A similar analysis was performed in Federal-Mogul World Wide, Inc. v. Mahle GmbH, 2011 U.S. Dist. LEXIS 110013 (E.D. Mich. Sept. 27, 2011). In that case, the court found, based on a series of “quotes, purchase orders, invoices, and drawings,” that there was “a reasonable inference that [defendant] was, through its contracting process, directing [the manufacturer] as to how, when, and in what quantities it was to produce the allegedly infringing pistons [made by the infringing method].” In Spendingmoney LLC v. Am. Express Co., 863 F. Supp. 2d 144, 154-155 (D. Conn. 2012) – another divided infringement case – the court denied summary judgment of no direct infringement of a prepaid charge card method patent where there was evidence that the defendant’s contracts with third party card issuers dictated how the charge cards would be implemented. By contrast, in e2Interactive, Inc. v. Blackhawk Network, Inc., 2012 U.S. Dist. LEXIS 190240 (W.D. Wis. Jan. 17, 2012), the court found that there was insufficient evidence of control or direction where, among other things, the service contracts between telecommunications providers stated that “the parties are independent contractors and that nothing in the agreement shall be construed as creating an agency, joint venture, partnership, employment relationship or franchise between them.”

Importantly, the control or direction analysis applies not only to patented methods, but also to patented systems. See, e.g., Golden Hour Data Sys., Inc. v. Emscharts, Inc., 614 F.3d 1367 (Fed. Cir. 2010).In Rowe Int’l Corp. v. Ecast, Inc., 586 F. Supp. 2d 924 (N.D. Ill. 2008), the patent claimed a jukebox system having multiple components. Even though no single defendant made all the components, the court denied summary judgment of no direct infringement because it found a question of fact as to whether one of the defendants had exercised control over the other parties’ manufacture of customized hardware.

As can be seen from the foregoing non-exhaustive examples, liability for direct infringement in divided infringement cases will turn on whether the accused infringer can effectively be deemed the “puppeteer” of the contracted parties. Given the importance of this question, defendants will naturally be motivated to seek early dismissal or summary adjudication based on the language of the contract in question. It will be the prerogative of patent plaintiffs to argue that there is a question of fact as to whether, as articulated in Emtel, the defendant “controls the details of the [] contractor’s work to such an extent that the contractor cannot perform the work as he chooses.” Conversely, it will be critical for defendants to show that the relevant terms of the agreement are unambiguous (thereby avoiding a question of fact), and that under those unambiguous terms, the contracted party had the freedom to perform autonomously. To that end, language in the agreement that clearly limits the ability of the contracting party to dictate the manner of performance will likely go a long way to precluding liability for direct infringement. On the other hand, if an agreement calls for a highly customized end-product or a result that cannot be achieved without step-by-step instructions, the contracting party may not be able to avoid direct infringement liability.